Dealing with REO Inventory; Another AARP Lawsuit; Loan Limit Cutoff Dates; LO Comp Feedback


night my wife met me at the front door. She was wearing a sexy negligee. The
only trouble was, she was coming home.

The correct perspective is important. For example, are property values in
Phoenix rebounding, or still mired down in quicksand
? And what could
Phoenix tell us about cities in the rest of the US? Sales are moving higher,
but certainly at lower prices than a year ago: They point to strong existing
home sales in June, up 22% according to the NAR. It was the second consecutive
month of strong sales, with the June figure the strongest recorded since
December 2006. But while sales may be up, prices are not. The NAR report says
the median price of a home sold in the Phoenix area in June was down 13% from
the same month in 2010, and many expect expects prices to remain weak because
distressed properties are accounting for 64% of sales: ADryHeat.

Phoenix’s “fun with numbers” reminds us that it is easy to be
confused, or misled, with seemingly simple numbers
. For example, imagine
you are saving for your child’s college costs, expected to amount to $100,000,
and that you are 80 percent of the way there with $80,000 in your account. The
next year, the value of your investment account drops 25 percent, to $60,000.
The year after that, it bounces back 25 percent. Are you back to where you
started? No, because now you have $75,000 in your account. Next, assume college
costs are rising 8 percent per year. Now how close to paying for college are
you? The answer: 64 percent, because you have $75,000 toward $117,000 of costs.
Even though your investments rose the same percentage as they fell, you’re
further from your goal than before. This is the same situation faced by pension

I’ve lost track – is this the week that the government wants out of mortgage
banking, and to dissolve Freddie Fannie, or is this the week when they
want to continue to control securitization, underwriting, and servicing? I
guess it is the latter: The Obama administration, through FHFA, Treasury, and
HUD, will seek investors’ ideas for turning thousands of foreclosed properties
owned by government-backed entities into rental homes, thus, in theory, helping
values and lowering inventories (?). Heck, Fannie Mae and Freddie Mac sold a
record 100,000 homes during the second quarter – I bet they’re becoming adept
at it. Fannie + Freddie + FHA = 250,000 homes at the end of June, or around
half of all unsold, repossessed properties. According to the WSJ, there are
another 830,000 homes through the three agencies in the foreclosure pipeline

– and they will all pass through the same 12 Realtors nationwide. (Just
kidding.) Owners of non-owner occupied properties across the nation are
protesting the move. (Just kidding again.) Seriously, anything is better than a
vacant, deteriorating property, and given many ex-owners’ credit reports, their
only choice is to rent. For more: Where’sMySecurityDeposit?

More on the LO comp issue, Kevin
Iverson with Reed Mortgage Corporation wrote, “Regarding the recent posts
about LO Compensation and renegotiations – actually the new LO compensation
rules should help with maintaining pipeline and reducing fallout. Previously,
prior to the new LO comp rules, if rates dropped a mortgage broker LO could
increase their compensation by simply pulling the loan from locked lender and
placing with another lender – maybe give the borrower better pricing and at the
same time increase his/her compensation. Now, assuming everybody is following
the rules (which might be a leap of faith), the LO is going to get paid the
same regardless of where loan is placed. Thus the LO has no incentive to pull
loan and place with some other lender, especially if a lot has already been
done on the loan (who wants to do more work?). And HVCC (or whatever they call
it these days) makes it problematic to place a loan with a new different
lender, as many lenders are not taking transferred appraisals.”

I received this note from a much respected attorney who specializes in mortgage
banking. “I am seeing some companies allowing an ‘overage’ account for
marketing expenses while others are not. And there is the perception that an
‘overage’ account is illegal. The terms ‘overage account,’ ‘points bank,’ and
‘bonus account’ are all non-specific, non-legal terms
.  Accordingly,
whether any one is ‘legal’ or, more precisely, whether any one is permissible
under the Truth in Lending Act’s new Loan Originator Compensation Rule and
other applicable state and federal laws, depends of course on the individual
situation.  However, as a general statement, it is certainly possible to
set up such an account in a manner which is fully compliant with all applicable
laws, including the new LO Comp Rule.  If properly set up and implemented,
it is also possible, within limits and subject to certain restrictions, to use
funds in that account for certain bona fide business expenses of the affected

Don’t forget that effective July 29, 2011, depository institutions were required
to become registered in NMLS under the SAFE Act
. According to the Board of
Governors, the S.A.F.E. Act imposes additional requirements upon MLOs who are
not employees of agency-regulated institutions, including state licensure and
testing requirements and character and fitness standards. In this regard,
employees of bank holding companies and their non-bank subsidiaries who act as
MLOs are subject to state licensure and associated state regulation. CanISeeYourLicense?

The National Reverse Mortgage Lenders Association has announced its 2011
Annual Meeting Expo
which will focus on the role reverse mortgages
can play in retirement planning and the emerging opportunities for realignment
of the industry following the departure of such entities as Bank of America and
Wells Fargo. “As some companies exit the sector, it creates room for
others to enter and grow,” says Peter Bell, NRMLA president and CEO. The
gathering will be held October 24-26 in Boston. Additional information can be
found at or by contacting
Marty Bell of NRMLA at

While we’re on reverse mortgages, the AARP filed another suit: AARPSuit. According to
Reverse Mortgage Daily, AARP filed a class action lawsuit against Wells Fargo
Bank and Fannie Mae on behalf of reverse mortgage borrowers and their survivors
who have faced foreclosure and eviction – that Wells Fargo has illegally
foreclosed upon reverse mortgage borrowers who were not notified and were not
given the opportunity to purchase the property for 95% of its appraised value
after the loan becomes due and payable. The lawsuit is the second suit filed by
AARP this year concerning reverse mortgage borrowers and their heirs. The
original suit was dismissed by the court in July.

Rock on…Farmer Mac?
Federal Agricultural Mortgage Corp. (AGM), commonly known as Farmer Mac, around
since 1988, reported second-quarter earnings more than doubled on higher
interest income. Credit quality continued to improve: 90-day delinquencies were
1.27% of its portfolio, improving from 1.3% a year earlier, and new program
business volume was $608.1 million, though it added $1 billion in the first

What happened to Option One? It
became Sand Canyon
, and it announced a resolution of claims of unfair and
discriminatory lending practices by modifying thousands of Massachusetts
homeowners’ loans and making a significant payment to the Commonwealth of
Massachusetts as part of a settlement valued at $125 million. It requires the
mortgage originator, a subsidiary of HR Block Inc., to pay $9.8 million to
the Commonwealth and to direct American Home Mortgage Servicing Inc. (AHMSI),
the current servicer of approximately 5,500 Option One loans in Massachusetts,
to institute an aggressive loan modification program that will provide an
estimated $115 million in additional relief. The suit alleged that the
risk-layered loans were unfair because they posed an excessive risk of default
and foreclosure, and that Option One knew that loans with such risk
characteristics were doomed to fail but that it originated them nonetheless in
order to sell them to the secondary market and realize a profit.

I have a clarification regarding Wells Fargo’s wholesale cut off dates for
, given the impending loan limit changes. “Temporary loan limits
scheduled to expire Sept. 30, 2011: Deadline for 45-day locks is Aug. 16.The
deadlines for locking loans using the temporary loan limits is: For 45-day
locks: Tuesday, Aug. 16, 2011 For 30-day locks: Wednesday, Aug. 31, 2011 For
15-day locks: Thursday, Sept. 15, 2011.  Reminder: Only the temporary loan
limits are expiring – permanent limits remain available after Oct. 1.
Therefore, transactions not impacted by the expiration of the temporary loan
limits may be locked at any time.”

Just so we’re clear here: Fannie 3.5% securities (which generally contain
3.75-4.125% loans) are now above 101 (a 1 point premium). Add some servicing
(this is clean, low coupon stuff!) and suddenly a 4% conventional mortgage is
earning the seller 102 (2 point premium) in the MBS market. What is passed on,
through originator rate sheets, is up to the lender. There are profit margin,
overhead, hedge costs, and so on that must be accounted for – but still, these
are record mortgage price levels.

Today is a new day, with more
potential volatility. Given the comments I am seeing, folks would be happy with
a quiet summer Thursday Friday heading into the weekend. Yesterday prices
quickly gained as EU fears related to French banks and their exposure to Greek
debt sent investors to the safety of the AA+ rated US (as opposed to AAA-rated
France!). We had a solid 10-yr note auction in the US, and yield hit a low of
2.10%. But things worsened slightly, and we closed around as the stock market
plummeted (again). Mortgage banker selling has been much muted – almost as if
companies are afraid to sell their new locks, instead using them to fill older
unfilled positions with investors and Wall Street.

Today we’ve had Jobless Claims,
and some trade numbers, and will have a $16 billion 30-yr T-bond auction. New
U.S. claims for unemployment benefits dropped to a four-month low last week, a
rare dose of good news – initial claims for state unemployment benefits fell
7,000 to a seasonally adjusted 395,000 from 402k the week before. MBS prices
are worse by 0.125 to 0.25.

(Parental discretion advised!!
Don’t read it and then write to grouse about it.)

From a teacher — short and to the point.

“In the world of hi-tech
gadgetry, I’ve noticed that more and more people who send text messages and
emails have long forgotten the art of capitalization. For those of you who fall
into this category, please take note of the following statement:

‘Capitalization is the difference
between helping your Uncle Jack off a horse and helping
your uncle jack off a horse.’ Is everybody clear on that?”

If you’re interested, visit my
twice-a-month blog at the STRATMOR Group web site located at . The
current blog takes a look at the recent U.S. credit downgrade by SP, and
whether it really matters. If you have both the time and inclination, make
a comment on what I have written, or on other comments so that folks can learn
what’s going on out there from the other readers.

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