April 17, 2014

What has 500 Pages, 3 letters, and What Does it All Mean?

Affordability has a strong impact on homeownership. Not surprisingly, per the NRA, I mean the NAR, four of five states with the lowest homeownership rates in the US are characterized by markets with high prices. Washington, DC has the lowest homeownership rate at 45.3%. At the opposite end of the spectrum, West Virginia, New Hampshire, Michigan, and Maine have among the highest affordability and homeownership rates. More information about state homeownership rates is available in the Local Market Reports for the 2nd quarter of 2013.

(In a related story, certainly the MBA’s application figures continue to show the impact of higher costs, higher rates, and greater restrictions. It reported yesterday that mortgage apps were off 2.5%, with purchases up 2.4% -2nd week up in a row – and refis off by 5.4%.  Refi’s dropped to 60% of total loans, a new recent low. Conventional refis were off 4.8% and GNMAs were off by 8.5% which reverses last week’s difference between the two.)

How many people are in the banking industry? Two million, that’s how many. At least that is what the American Bankers Association says it represents, which I read when it sent out the response by Frank Keating, ABA president and CEO, to the QRM news yesterday. “We applaud the proposed Qualified Residential Mortgage rule released by federal regulators today. Gratefully, the proposed rule aligns the QRM definition with the existing Qualified Mortgage rule. This will encourage lenders to continue offering carefully underwritten QM loans, including those with lower down payments. As a result, it will help the economy and ensure the largest number of creditworthy borrowers are able to access safe, quality loan products at competitive prices.

‘The proposed rule removes unnecessary risk retention and capital requirements, which would reduce the availability of low-risk loans.’”

Not so fast! I don’t know what “final” means anymore, and the 500-page QRM verbiage is subject to a 60 day comment period (the first rules issues in 2011 have received 10,000 comments) – until almost Halloween. Regulators originally said banks and bond issuers would have to keep “skin in the game,” or hold part of securitized loans on their books, for all loans except mortgages that included a 20 percent down payment. After backlash from housing and consumer groups, regulators decided to drop the down payment requirement.

Practically everyone in the alphabet from the ABA to the SEC seems to be behind it, basically saying, “If we have to have QM and QRM, they may-as-well match up.” “An eased version of a rule requiring lenders to keep a stake in risky mortgages that they securitize, a restriction designed to discourage the kind of lax underwriting that contributed subprime credit crisis, will be proposed by U.S. regulators today. The 500-page draft regulation written by a panel of six agencies will replace a more stringent proposal for the Qualified Residential Mortgage rule. The first version, which was released in 2011, drew protests from housing industry participants and consumer groups who said it would be too restrictive of home lending. The plan would require banks to retain a slice of mortgages when borrowers are spending more than 43 percent of their monthly income to repay their debt. The earlier proposal would have required banks to keep a stake in loans when borrowers were spending more than 36 percent of their income on all loan payments and in loans with down payments of less than 20 percent.”

The agencies involved in the rulemaking are the Federal Reserve, Federal Deposit Insurance Corp., Department of Housing and Urban Development, Federal Housing Finance Agency, Office of the Comptroller of the Currency, and Securities and Exchange Commission. Don’t forget that the CFPB is behind QM.

Dave Stevens with the MBA wrote, “Today, six regulators, including the FDIC, Federal Reserve, SEC, OCC, HUD, and FHFA re-proposed the Risk Retention Rule. The re-proposal is a clear response to MBA, and others in the consumer and real estate finance industry, who voiced concerns about key provisions in the rule. Recognizing its importance, I wanted to share with you summaries of this re-proposed rule that affects both residential and commercial/multifamily members…In particular, there are five main points to highlight: 1. The re-proposal aligns the Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) definitions for risk retention purposes. The QRM definition includes both safe harbor and rebuttable presumption QM. MBA supports this decision and is extremely pleased the regulators restructured the rule to include this distinction. 2. The re-proposal seeks public comment on an alternative option that would add a 30% down payment or equity requirement to the QRM definition. MBA strongly disagrees with this decision because it would severely impair access to credit. We will seek to have this provision removed from the final rule.”

Mr. Stevens’ bulletin goes on. “3. The Premium Capture Cash Reserve Account (PCCRA) was eliminated from the re-proposal.  MBA has strongly advocated for this decision because the PCCRA would have virtually eliminated the financial incentive for issuing CMBS. 4. The re-proposal is also responsive to MBA’s recommendations on additional flexibility in risk retention structures, a modified duration/hold period, and modifications to the “operating advisor” proposal for CMBS. 5. A notice and comment period for the re-proposed rule was issued for 60 days and will end October 30, 2013. MBA will be working with its members to develop comments and ensure that our concerns and comments are communicated to the regulatory agencies.

But things are never straightforward any more. Industry critic Edward Pinto noted in his writing why a Qualified Residential Mortgage is not the same as a Qualified Mortgage. “Defining these two terms is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  However, the proposed QRM definition turns the statutory language and the agencies’ earlier analysis upside down. A QM was intended in Dodd-Frank to define a minimum loan standard, not to define a low risk loan.  Certainly the CFPB’s QM definition demonstrates this-a QM may have no down payment, a 580 FICO credit score (a score in the bottom one-eighth of all scores), and a 50%+ debt-to-income (DTI) ratio (if approved by Fannie, Freddie, or FHA).  A loan with these characteristics is certainly not “prime,” yet the CFPB would call such a loan prime.”

He goes on. “A QRM was intended to set a standard for loans placed in a mortgage backed security (MBS) that have a low credit risk as evidenced by their past performance.  In their earlier March 2011 proposed QRM rule, the six agencies defined a QRM as a loan with a ‘low risk of default even in a stressful economic environments that combine high unemployment with sharp drops in home prices’. They concluded based on substantial and rigorous research that to be a low risk loan, it needed demonstrate three qualities: a substantial down payment of 20% (or low loan-to-value on a refinance loan), a clear demonstration of credit worthiness, and a DTI ratio of less than or equal to 36%. “QRM = QM” clearly does not pass muster under any low risk standard. The long-term credit performance of the housing mortgage market can only be as sound as the underwriting practices used to originate a preponderance of loans in that market.  It is axiomatic that a sound market requires that the preponderance of loans be prime or low risk loans.  By caving in to the demands of the lobbies representing the Government Mortgage Complex, both the CFPB and the six agencies are committing a grievous error. Calling QMs a prime loan and making QM = QRM gives risky loans an imprimatur they do not deserve.  This is a repeat of the false comfort Fannie and Freddie gave to the definition of a prime loan.  As we now know there was little that was prime in most of their prime loans.”

Where does all this put the poor LO? For now, there are no changes. Non-QRM loans and non-QM loans are not against the law. Nor are they “bad” loans – just ask ex-CFPB officer Raj Date who has created an investor for non-QM production. The qualified mortgage, or QM rule, contains no down payment requirement. For loans in which borrowers are spending no more than 43 percent of their income on debt, the QM rule protects banks from being sued by investors or homeowners for faulty underwriting. And that is the crux of the matter – in this litigious environment lenders want to stay away from potential lawsuit liability years down the road. So banks mortgage banks are going to lend in a box that keeps them from being sued in some class action lawsuit.

But we can expect quite a bit of development at the lender and AUS level over the next four months leading up to January 10th. One has to believe that soon, when a loan is entered into DU or LP or an automatic underwriting program, it will either be a QM or not, in which case the bank or mortgage bank will either allow it or not. But non-QM loans are not bad loans, in which case, where will they go, and at what rate and price? Will there be compensating factors, like the old days? And as rates stay high, loan level price adjustments remain high, and documentation requirements prove onerous for some borrowers including first time home buyers, will the resulting impact on residential lending push the government or an agency to change the rules yet again? Stay tuned!

Today we had the GDP numbers. Remember that GDP is the total output of goods and services produced by labor and property in the US and this information is compiled and reported by the Bureau of Economic Analysis (BEA). The BEA divides GDP into four sectors of the economy – consumer purchases (Real Personal Consumption Expenditures), business investment (Real Nonresidential Fixed Investment), government spending (federal, state and local) and net exports. (Exports add to GDP, imports subtract from it.) The process begins with an advanced estimate about a month after quarter end, then a second and third estimate. The BEA even cautions that the first number for a given quarter is an advance estimate and based on source data that are incomplete and subject to further revision.

But this week we’ve seen some volatility, mostly based on the impact of a military strike in Syria will have on our economy. (Now apparently it is delayed in order to build more support – a kinder, gentler attack?) Tuesday we had a flight to safety, yesterday it went away. Tuesday the price on the 10-yr T-note improved by .75, yesterday it was down a half. Agency MBS prices tagged along. Mortgage originations and locks and sales continue to be below the recent moving averages. No lender is saying their back office is backed up, and any company built around refis has seen (per the MBA) refi biz dropping for 11 weeks in a row.

Today we had the second reading on Q2 GDP. It was expected higher at +2.2 percent from the advanced print of +1.7 percent. It came out at 2.5%, +.7% on the revision, and much stronger than expected. Also reported was weekly Initial Jobless Claims which was expected to decline by 4k to 332k. It was -6k from a revised 337k to 331k, also stronger than expected. (Later we’ll have a $29 billion 7-yr note auction.) After this news, the 10-yr is sitting around 2.81% after closing at 2.78%, and agency MBS prices are worse about .125 than Wednesday’s close.

Article source: http://www.mortgagenewsdaily.com/channels/pipelinepress/08292013-nra-nar-qrm-rates.aspx