Dodd-Frank:(Not) Addressing Too Big To Fail; New Mortgage Reform Legislation; Call Report Deficiency Deadline; Appraisal Buybacks


We have 18 months until the presidential
election, and already things are heating up. The financial community is closely
following Donald Trump’s campaign, with the slogan is rumored to be: “We
Shall Overcomb!” And if he runs and wins, there will be hell toupée.

Wake me up when this is over. Legislators have introduced a proposal to
eliminate two companies (Fannie Freddie) who have a government guarantee,
and replace them with five private companies who will also have a
government guarantee? What am I missing here? I need to finish my
half-completed Jamba Juice application. TheFuture?.

And how do we mesh that with the stories in the news this morning?
“Some Republican lawmakers, as well as other officials and insiders, are
concerned that regulators implementing the Dodd-Frank Act are not resolving
the problem that some financial institutions are ‘too big to fail.’

Regulators told the Senate banking committee that they are dealing with the
issue. ‘A major thrust of the Dodd-Frank Act is addressing the too-big-to-fail
problem and mitigating the threat to financial stability posed by systemically
important financial firms,’ said Federal Reserve Chairman Ben Bernanke.”
On top of that, “Several top regulatory positions will be vacant or
filled by caretakers
when financial regulators next meet to discuss their
progress toward changing regulations for the financial industry. The White
House has not announced plans to fill several positions, including chairmanship
of the Financial Deposit Insurance Corp.” And lastly, “Sheila Bair,
chairman of the FDIC, said major financial institutions should be subject to
higher capital requirements than proposed. Bair wants the big banks to prove
that winding them down would not be a problem if they become insolvent
. ‘I
believe we should impose even higher capital charges on systemic entities until
they have developed a resolution plan which has been approved as credible by
their regulators,’ Bair said.”

When I speak to various groups, I remind them of the role that the rating
have had in the credit crisis, as there is certainly plenty of
blame to go around. Investors have been trying desperately in recent years to
force credit rating agencies to answer for at least some of the severe losses
suffered in the wake of the mortgage meltdown, but that became much harder following
a ruling yesterday by the Second Circuit. It held that Moody’s, Standard
Poor’s and Fitch Ratings can’t be held liable for their ratings of
mortgage-backed securities. In a story in the Wall Street Journal, the court
said that ratings firms provided “merely opinions” about the
credit-worthiness of mortgage- backed securities, and such opinions are
entitled to First Amendment protection.
“But perhaps all is not lost
for investors…investors have sued rating agencies under different theories,
including negligence and negligent interference with prospective economic
advantage. And these sorts of claims are not affected by the Second Circuit’s

Here is a quick licensing update regarding
the Mortgage Call Report. “Will NMLS place a deficiency on our
company license if we don’t complete the Q1 MCR filing by May 15?” The
answer is, “No. Due to the truncated time period between the launch of
functionality and the deadline for the Q1 MCR filing, the system will not begin
applying license deficiencies related to the Q1 MCR until June 16.”

Coester Appraisal Group, a nationwide
appraisal management company, has launched a 100% repurchase guarantee program
that protects its clients against appraisal based buybacks. “Coester
Appraisal Group will guarantee all original appraisals it completes moving
forward. The guarantee is applicable for any appraisal-based repurchase request
as long as the loan is in good current standing and not in any stage of
delinquency.” For details (and no this isn’t a paid announcement) go to CoesterAppraisals.

The program appears to be similar to a program that Wells Fargo may be rolling
out, titled “Collateral Valuation Warranty Program.”
“Determining collateral value is an integral and key component of the
mortgage loan underwriting process.  The accuracy of the valuation is
essential for the lender to properly assess the collateral property pledged as
security for the mortgage loan and for determining the Loan-to-Value
ratio.  Insuring various methods of valuation by a warranty, and backed by
an Errors Omissions insurance policy, provides added assurance of the
correct value to the investment community. The warranty comes in the form a
Service Agreement between appraisal vendor and lending institution, in which
the carrier indemnifies the appraisal vendor for accuracy of the actual value
as of the date of the report. The appraisal vendor has obtained an Errors
Omissions policy that covers losses from claims filed against them as a result
of an error in the property value that results in lender loss.”

One reader wrote, “Guarantees like this would extend to certain loans, as
collateral is only a portion of the credit decision – even if they claim it’s
an ‘appraisal based repurchase.’ I do not think I would offer this guarantee on
anything over 65% LTV given the volatile conditions that prevail in most
housing markets. Any company offering a guarantee like these must have plenty
of business rules and good screening in place before a deal is eligible for
this kind of guarantee, I would think the requirements are pretty

For company news, Discover Financial
has agreed to buy, for about $56 million, the mortgage assets of Home
Loan Center
, a unit of Inc. Discover is primarily a credit
card lender but is looking to boost its revenue – and what better way than in
mortgage originations? reported its first-quarter loss widened as
selling and marketing expenses jumped, and revenue fell 25% to $33.4 million.

Ellie Mae (owner of LOS Encompass)
first-quarter loss narrowed on higher revenue and margin. Ellie makes money
through fees not only from originators but also from lenders and servicers who
book business through the network, although in the latest period Ellie Mae
posted a loss of $799,000, compared with a year-earlier loss of $1.6 million.
Revenue increased 19% to $10.6 million, gross margin rose to 68.3% from 65.4%,
and active Encompass lenders were up 18%.

Freddie announced that their poll shows 30-yr
mortgage rates are at their lowest level of the year. (One leading economist told
me that, basically, it is probably more important to pay attention to the trend
in Freddie’s weekly numbers rather than the number itself.) And although many
resetting ARM loans are actually seeing their rates drop, some pickup in
refinancing activity is expected. On the other hand, refi activity remains
constrained by tight credit conditions, continued weak or even stable home
values, higher LLPAs (loan level pricing adjustments), and reduced competition
amongst originators

The guys were all at a deer camp. No one wanted to room with Bob, because he
snored so badly. They decided it wasn’t fair to make one of them stay with him
the whole time, so they voted to take turns.

The first guy slept with Bob and comes to breakfast the next morning with his
hair a mess and his eyes all bloodshot. They said, “Man, what happened to
you?” He said, “Bob snored so loudly, I just sat up and watched him
all night.”

The next night it was a different guy’s turn. In the morning, same thing, hair
all standing up, eyes all bloodshot. They said, “Man, what happened to
you? You look awful! He said, ‘Man, that Bob shakes the roof with his snoring.
I watched him all night.”

The third night was Fred’s turn. Fred was a tanned, older cowboy, a man’s man.
The next morning he came to breakfast bright-eyed and bushy-tailed. “Good
morning!” he said. They couldn’t believe it. They said, “Man, what

He said, “Well, we got ready for bed… I went and tucked Bob into bed,
patted him on the rump, and kissed him good night. Bob sat up and watched me
all night.”

If you’re interested, visit my twice-a-month blog
at the STRATMOR Group web site located at . The current blog
considers the near and longer-term outlook for jumbo lending.  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


Leave a Reply